New Construction Home Loans A TO Z Guide

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Prime Rate Loans

Prime Rate Construction Loan interest is just that, its based on the current Prime Rate. Relative to your credit score and past borrowing history, income and debts, and the LTV (Loan-to-Value) ratio the Prime Rate offers made to you may be one percent above or below the current norm. Because the prime Rate fluctuates continuously, there is no way for you to insure that rate, for the construction phase by requesting it to be locked-in. You can, however, lock-in your permanent interest rate after you make application for your construction loan. If construction does go over the specified time the lock-in rate will require additional funding as well.

The Lock And Build Program

If fluctuating Prime Rates put you off consider applying for an interest rate that is not based upon the Prime Rate. If granted, this type of loan offers the protection of fixed rates both during construction and after occupancy. A fixed rate of interest will also eliminate the need for lock-ins and their additional expense, particularly if you run over schedule.

Go one step further and arrange for a fixed rate during construction and a one time opportunity to adjust the interest rate at the time of modification. You could come out ahead of the game.

Two Ways To Disburse Your Construction Funding:

The system described above is a multi-step program based on the completion and appraisal of distinct phases of the construction in progress. It is commonly known as the draw system of disbursement. Deadlines are met, specific aspects are finished and then the money is drawn from your account to pay the bills. In the scenario above there were six draws from start to finish and you or the contractor had total control of all funding that is released.

The other system is based upon vouchers. Upon the presentation of bills and receipts for work the Title Company or attorney responsible will disburse exactly what has been billed for on a case by case basis, regardless of what else has or has not been completed.

Construction End Loans

Simply put, this is a conventional loan for a newly constructed home that you did not build.

A Final Note of Caution: The most important things to watch out for when you are involved in a construction project are cost over-runs due to:

• Not having all the proper approvals, permits and contracts before hand and being ordered to stop and correct whatever problem has resulted from such negligence.
• Not keeping to the schedule and paying penalties as a result.
• Not inspecting the work as it is completed.
• Changing the original architectural plan.
• Changing the types of materials specified.
• Using your disbursements for things other than the construction of your new home

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